Forward P&L
1.5 A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0080 per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is (a) $0.0074 per yen; (b) $0.0091 per yen?

Andrea Roncoroni (Finance Dept)

FIN165Financial Markets

ESSEC Business School

4 / 19

Forward P&L
1.6 A trader enters into a short cotton futures contract when the futures prices is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain of lose if the cotton price at the end of the contract is (a) 48.20 cents per pound; (b) 51.30 cents per pound?

Andrea Roncoroni (Finance Dept)FIN165 Financial Markets

ESSEC Business School

5 / 19

Option P&L
1.7 Suppose that you write a put contract on AOL Time Warner with a strike price of $40 and an expiration date in three months. The current stock price of AOL Time Warner is $41 and the contract is on 100 shares. What have you committed yourself to? How much could you gain or lose?

Andrea Roncoroni (Finance Dept)FIN165 Financial Markets

ESSEC Business School

6 / 19

Asset vs. options based strategy
1.8 You would like to speculate on a rise in the price of a certain stock. The current stock price is $29, and a three-month call with a strike of $30 costs $2.90. You have $5,800 to invest. Identify two alternative strategies, one involving an investment in the stock and the other involvinginvestment in the option. What are the potential gains and losses from each?

Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

7 / 19

Option P&L I
1.9 (= 1.11) A trader sells a European call on a share for $4. The stock price is $47 and the strike price is $50. Under what circumstances does the trader make a pro…t? Under what circumstances will the option beexercised? Draw a diagram showing the variation of the trader’ pro…t s with the stock price at the maturity of the option.

Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

8 / 19

Option P&L II
1.10 (=1.12) A trader buys a call option with a strike price of $45 and a put option with a strike price of $40. Both options have the same maturity. The callcosts $3 and the put costs $4. Draw a diagram showing the variation of the trader’ pro…t with the asset price. s

Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

9 / 19

Option selection
1.11 (=1.19) A company knows that it is due to receive a certain amount of a foreign currency in four months. What type of option contract is appropriate for hedging?Andrea Roncoroni (Finance Dept)

FIN165 Financial Markets

ESSEC Business School

10 / 19

Forward vs. option based strategies
1.12 (=1.20) A United States company expects to have to pay 1 million Canadian dollars in six months. Explain how the exchange rate risk can be hedged using (a) a forward contract; (b) an option.

...Weather Derivatives.
Description and discussion:
Even in our advanced, technology-based society, we still live largely at the mercy of the weather. It influences our daily lives and choices, and has an enormous impact on corporate revenues. Until recently, there were very few financial tools offering companies protection against weather-related risks. However, the invention of the weather derivative has changed all this by making weather a tradable commodity....